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Saudi Strategy Working: OPEC Captures Largest Market Share Since 1975

OPEC Meeting

OPEC has captured its largest share of the oil market since 1975, which could be seen as a vindication of the cartel’s strategy over the past two years. But it also creates vulnerabilities for the U.S. and others, who are once again increasingly dependent on the Middle East for oil.

OPEC and its de facto leader Saudi Arabia have pursued market share over the past two years, and with great success. Rather than curtailing production in order to prop up prices, OPEC members ran horrific budget deficits and kept output elevated. That crushed crude oil prices, and has forced many high-cost drillers out of the market – and continues to do so. Even though the overall benefit to OPEC is questionable given the huge revenue losses, OPEC has emerged with its largest market share in forty years.

That might be viewed as a win in Riyadh, but it creates problems elsewhere – the world is at risk of being overly dependent on the Middle East for oil, warns the executive director of the International Energy Agency, Fatih Birol, in an interview with The Financial Times. Oil producers in the Middle East now have 34 percent of the global market share at 31 million barrels per day, the highest share since it had 36 percent back in 1975. By comparison, during the oil price bust in the 1980s, a time when new supplies came online in the North Sea, the Middle East’s share fell to 19 percent.

The U.S. has lost 900,000 barrels per day since April 2015 because low oil prices forced shale companies to bring drilling to a halt. Meanwhile, OPEC members Iraq, Iran, and Saudi Arabia ramped up output. “The Middle East is reminding us that they are the largest source of low-cost oil,” Fatih Birol told the FT. Related: Lockheed Tech Breakthrough Is About To Revolutionize Oil Exploration

Fatih Birol told The Financial Times that unless western governments take much stronger policy action to reduce oil demand, dependence on the Middle East will create larger vulnerabilities. “The Middle East is the first source of imports,” Mr. Birol said. “The higher the demand growth the more we [consumer countries] will need to import.”

What has occurred alongside OPEC’s rising market share, of course, is the collapse of crude oil prices. Not only does that knock out high-cost producers in U.S. shale, but it has also continued to keep much of the world hooked on oil. The fuel efficiency of America’s car fleet improved rapidly when oil prices were in triple-digit territory, but the collapse of crude oil prices to below $50 per barrel has halted the efficiency improvements – 2015 was a record year for auto sales and 2016 is shaping up to be a record year for gasoline consumption in the United States. Bad news for the climate and bad news for import dependency.

This is not the first time that the IEA has issued warnings about complacency. Not only is cheap oil derailing some environmental initiatives, but it also threatens long-term supplies and thus creates the conditions for an oil price spike. For several years, the IEA has predicted that U.S. shale production will peak in the early 2020s before fizzling out. Late last year, in its 2015 World Energy Outlook, the IEA concluded that although industrialized countries are enjoying low oil prices today, the “economic benefits are counterbalanced by increasing reliance on the Middle East for imported crude oil and the risk of a sharp rebound in price if investment dries up.” Related: Oil Drillers On Thin Ice As Banks Tighten Credit

In January at the World Economic Forum in Davos, Mr. Birol banged that drum once again, warning that low oil prices are sowing the seeds of the next price surge because upstream investment fell by 20 percent last year and could fall by nearly as much this year. “This is unprecedented: we have never seen two years in a row of falling investment. Don’t be misled, anybody who thinks low oil prices are the ‘new normal’ is going to be surprised,” Mr. Birol said in January.

The answer? Mr. Birol says that the U.S. and other industrialized countries must attack demand, imposing much stricter fuel efficiency standards on vehicles. That will address multiple problems at once: reduce greenhouse gas emissions, reduce dependence on the Middle East, and insulate economies from volatile oil prices.

“U.S. oil production will increase, but it is still an oil importer and will be for some time,” Mr. Birol told the FT, cautioning that although shale output will return, it won’t be a long-term solution. “Some have the view the rise of tight [shale] oil will sideline the Middle East. This view, I would never subscribe to.”

By Nick Cunningham of Oilprice.com

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  • JHM on July 07 2016 said:
    One word, lithium.

    1 TWh/y of batteries, 20 50GWh-Gigafactories, is enough for 25M EVs, enough to offset 1 mb/d of oil demand. In 2015, EV battery makers produced 11.5 GWh, up 74% from prior year. At 75% growth per year, we can hit 1 TWh capacity by 2023.

    This will be enough to arrest any attempt of OPEC to squeeze oil supply. Pricey oil will only accelerate growth in EVs and deprive OPEC of demand. Lasting energy independence will come from batteries and domestic renewable energy.
  • Mchentrp on July 07 2016 said:
    Hey...great strategy. Buy it at retail, sell it at wholesale, make up the difference in volume.
  • RussianJew on July 08 2016 said:
    Just in case EV-enthusiasts missed it: Tesla sold 14500 cars in the second quarter - instead of 17000 planned. 500 000 cars to be sold in 2020? Right. Tesla keeps losing money and will be dead soon.
  • Joe on July 10 2016 said:
    If America is worried about oil supplies from Saudi Arabia, just allow the Keystone XL pipeline from Canada to be built and bingo, no more Saudi imports!
  • Major on August 02 2016 said:
    This isn't the first time that American market share declined as our competitors learned to be "low cost producers."

    The list of lost world markets for "too expensive" American goods is a long one -- as is our now chronic trade deficit.

    It remains to be seen if our defacto economic policy of inflation subsidized. debt fueled consumption is a workable substitute for learning how to provide the value-added products and services for satisfying the endless wants and needs of those world citizens eager to better themselves, their families and their communities.

    Perhaps Federal Reserve plans to restore long-gone organic growth (and value-added labor) by having every American homeowner to a "sale and leaseback -- with his neighbor?

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